Debt Intolerance : Threshold Level and Composition
Fiscal vulnerabilities depend on both the level and composition of government debt. This study examines the role of debt thresholds and debt composition in driving the non-linear behavior of long-term interest rates through a novel approach, a pane...
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| Format: | Working Paper |
| Language: | English |
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World Bank, Washington, DC
2020
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| Online Access: | http://documents.worldbank.org/curated/en/634991591901999238/Debt-Intolerance-Threshold-Level-and-Composition http://hdl.handle.net/10986/33906 |
| Summary: | Fiscal vulnerabilities depend on both
the level and composition of government debt. This study
examines the role of debt thresholds and debt composition in
driving the non-linear behavior of long-term interest rates
through a novel approach, a panel smooth transition
regression with a general logistic model. The main findings
are threefold. First, the impact of the expected public debt
level on interest rates rises exponentially when the share
of foreign private holdings exceeds approximately 20 percent
of government debt denominated in local currency. Second,
when the share of foreign private investors is 30 percent,
an increase in the share of foreign private holdings of
government debt could raise long-term interest rates once
the public debt-to-GDP ratio exceeds 60 percent of GDP,
offsetting the downward pressure on long-term interest rates
from higher market liquidity. Third, out-of-sample forecasts
of this novel non-linear model are more accurate than those
of previous methods. |
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